Monetary Policy
Maintain end-2010 OPR target at 2.75% and 3.25% for 2011: Amid divided market expectations, Bank Negara Malaysia (BNM) lifted the overnight policy rate (OPR) by another 25bps to 2.75% after yesterday's meeting, continuing a sequence of three consecutive rises since last March.
We had expected a pause in rate increases as this would allow the central bank to assess the impact of Europe's debt problems on the global environment as well as to wait for information on domestic economic conditions.
We concur with BNM's positive assessment of continued economic expansion, underpinned by a firmer strength of domestic demand as well as exports.
However, Bank Negara Malaysia did not dismiss concerns over external uncertainties that would moderate the pace of domestic growth.
A slew of high frequency global and domestic economic indicators suggest Malaysia’s growth momentum could slow in 2Q. We are estimating 7.8% year-on-year growth in 2Q compared with 10.1% in 1Q. We maintain our GDP growth estimate of 7% this year and 5.5% for 2011.
BNM reiterated that domestic prices would remain moderate in 2H10 and going into 2011, taking into account possible adjustments in administered prices.
We estimate that CPI growth will edge higher, between 1.6% and 2.2%, in 2Q and 3Q, largely reflecting the statistical base effects as a brief period of deflation set in during 2H09.
We maintain this year's Consumer Price Index (CPI) growth estimate at 2%.
BNM signalled its readiness to refrain from further interest rate increases in the coming months as signs mount that the global economy is cooling.
In our view, the central bank has raised the bar to further rate hikes as it makes a reference to the current level of rates being appropriate and consistent to support the anticipated growth outlook in 2H10, given the still moderate inflation picture.
Faced with growing headwinds from Europe's sovereign debt crisis, the rate pausing will give BNM time to asses the impact of previous rate hikes and also gauge whether Europe's debt woes threaten the global economic recovery.
BNM continued to reiterate that the current monetary environment is still accommodative, implying that it will not place a heavy foot on the brakes. We therefore maintain our end-2010 OPR target at 2.75% and 3.25% for 2011. — CIMB Research, July 9
This article appeared in The Edge Financial Daily, July 12, 2010.
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